"In the main body of this letter I discuss, after re-reading Graham and Dodd's writings on Value Investing, how the various Third Avenue Fund managers are followers of Graham and Dodd, and how these managers are different. Before doing that, there is one macro point in which I believe strongly, and of which you should be aware. There is no way that I can see that those countries involved with the Euro can be made credit-worthy unless all European Sovereign Debt is assumed, or guaranteed, by each member country including, especially, Germany. Such an amalgamation would make Euro Sovereign Debt more comparable to U.S. Treasuries than is now the case. I do not know how the forthcoming European upheavals will work out. But cash rich economies with a plethora of investable funds ought to do okay, provided they are opportunistic. It is comforting to know that so much of Third Avenue Management's common stock investments are in companies operating in Hong Kong, mainland China, South Korea, Canada, Brazil, Australia and Sweden."

"Based, as always, upon a bottom-up, value oriented, approach to analysis, my view of what is happening in the U.S. economy seems to be quite different from the views held by politicians and academics. Third Avenue shareholders, hopefully, might gain insight from understanding my views about the economy and various economic entities, particularly with regard to the U.S. economy, the global economy and, most important to Third Avenue Management, the companies that must contend with both."

"Ambac Financial declared bankruptcy, needlessly. Had Congress acted to change the tax code to give troubled corporations a much needed break, Ambac probably could have raised enough equity to rebuild its core business. Unfortunately the U.S. tax code left Ambac with no way of raising equity without destroying one of its most valuable assets, $7 billion worth of net operating losses that could have been used to offset future tax burdens after the company returns to profitability."

"It is difficult to function as a value investor unless the value analyst has a firm grasp of economic reality. It is equally difficult to promulgate intelligent financial regulations unless the sponsors of the regulation have a firm grasp of economic reality. Neither the general public, nor legislators and Obama administration officials, seem to have much of a grasp of economic reality, at least when it comes to dealing with troubled financial institutions."

"For us, the principal test is credit-worthiness--don't buy common stocks of companies that need continuous access to capital markets. Or where customers or counter-parties can discontinue relationships at little or no cost."

"A Net-Net is defined as a common stock issue where the market value of high quality assets, usually readily saleable, exceeds by a comfortable margin the market value of the company's equity capitalization after deducting all liabilities. The concept of Net-Nets was invented by Graham and Dodd, the godfathers of value investing. Third Avenue has refined the Graham and Dodd definition of Net-Nets."

"In other words, deep value and high quality alone are not sufficient conditions for investing in common stocks. Deep value pricing and high quality assets must be accompanied by creditworthiness, and it's super hard to be credit worthy today if a corporation has to access credit markets for loan instruments other than demand deposits."

"Few investors in the market today are as bear-market-seasoned and savvy as Marty Whitman, 84-year-old founder of M.J. Whitman LLC, chairman and founder of Third Avenue Management and portfolio manager of Third Avenue Value Fund. Like Sam Zell, Leon Black and Eddie Lampert, Whitman's roots are in distressed-company investing."

"Marty Whitman, the octogenarian dean of deep-value investing, sees great bargains to be snapped up from the current stock market meltdown. "It's a great time," enthused the 83-year-old founder of New York-based Third Avenue Management LLC before speaking yesterday at a conference organized by AIC Ltd. "We can't try to pick the bottom, but it seems to me that there are great values out there now, just like in 1974," the firm's co-chief investment officer said in an interview."

"Distress securities seem to be trading at ultra attractive prices. Discounts have widened appreciably for the common stocks of very well-capitalized companies where the common stocks trade at meaningful discounts from readily ascertainable net asset values ('NAVs'); and where the prospects appear good that over the next five years, such NAVs will increase by not less than 10% per annum compounded. Admittedly, near-term outlooks are generally poor. But, TAVF focuses not on the near-term outlook, but on buying what is 'safe and cheap'. I have the unique perspective of being a distressed investor for many decades, and safe and cheap on a long-term basis seems to be about as attractive as it was in the 1970s."

"One of the important lessons from the Bear Stearns debacle for TAVF is to avoid owning common stocks where the businesses need to have relatively continuous access to capital markets in order to survive as going concerns."

"Obviously, I feel good about TAVF's investment in MBIA. The Fund ought to do well under almost any scenario. By any objective standard, the MBIA investments are attractive ones with the insurance subsidiaries deserving of an AAA-Stable rating. Yet, there exists a sense of discomfort due to the dangers of Rating Agency subjective considerations and capricious regulators."

"The mortgage meltdown-housing collapse seems nothing new for the U.S. economy. During the last 60 years, virtually every sector of the American economy has gone through depressions as bad as anything that occurred in the 1930s. Remember the melt-downs during the past 40 years for, inter alia energy, banks, real estate, savings & loans, Wall Street brokerages, row crops, steel, automobiles, machine tools, etc. Unlike the 1930s, all these depressions occurred without domino effect. The probability seems to be that the next ten years in the U.S. will be more like the last 40 than they will be like the 1930s. Put otherwise, the odds favor overcoming the current crisis in residential housing and residential housing finance without underlying damage to the U.S. economy."

""Safe and cheap" makes for a comforting mantra. Rather than timidity, though, Whitman's approach actually calls for remarkable fortitude. It requires the nerve to pick through distressed companies that others are ignoring and demands the conviction to see big gains come to fruition."

"Distress investing begins with companies that have flopped because of bad managers, bad balance sheets, or a combination of both. It uses bankruptcies and sweeping corporate reorganizations to make handsome profits off the misfortunes of poorly run entities. "This is a high .beta' business," Mr. Whitman said with just a hint of sarcasm."

""We're such cowards!" said Martin Whitman, the 82-year-old legendary superinvestor, at a seminar organized by New York Society of Security Analysts on February 16, 2006, "We only want to be the senior-most creditors in distressed situations. We only want to be the adequately secured lenders in Europe and overseas. We don't want to be subordinate to any of the asbestos or tobacco liabilities..." And he brilliantly calls himself the "safe and cheap" investor."

"Marty Whitman, the octogenarian investor and Wall Street legend, was once prodded on the stock-picking style of his firm, Third Avenue Management. "We are offbeat," he said. That's one word for it. Canadian investors, seeing what he has been up to lately, might have a few others. "Barking mad" comes to mind. "Insane" works. "Masochistic" fits, too, because one of the stocks Third Avenue has been buying by the truckload is -- wait for it -- the pride of Montreal: Abitibi-Consolidated. Oh, please, try not to laugh. It's impolite. Try not to tell yourself the Americans have been suckered again, buying into a Canadian manufacturer because it "looks cheap" when it is, in fact, one of the best living examples of wealth destruction in modern capitalism." [or why people have a hard time being value investors]

"In NAV investing, scant attention is paid to top down factors such as predicting Gross Domestic Product, interest rates, the Dow-Jones Averages, federal deficits or balances of payments. Rather, the emphasis is on bottom-up "nitty gritty". It is assumed that the NAV investor ought to do okay long term as long as there exists political stability and an absence of violence in the streets. This has been the case for value investing since World War II. The Fund is betting that the environment of the last 60 years, where macro factors have been relatively unimportant for value investors, will continue."

"Whitman, who describes himself as a "cowardly" investor, says he basically looks for four things in an investment: 1. A high quality balance sheet. 2. Competent and shareholder-orientated managers. 3. Understandable and honest disclosure documents. 4. Priced at 50c-60c on a dollar. The first three characteristics are related to safety and the fourth to how cheap the stock is. "And 'safe' is more important than 'cheap'", says Whitman."

"The bible of value investing, Benjamin Graham and David Dodd's 'Security Analysis,' dates back to 1934. And yet 72 years later the distinction between market risk and investment risk seems more muddled than ever."

"Mutual fund grand master Marty Whitman has a well-deserved rep as an obstinate and cantankerous cuss. For the fidgety Whitman, sitting still in a chair while a subordinate delivers a subpar financial analysis is impossible. Failing to follow Whitman's value-investing dicta would earn the poor slob a humiliating dressing-down. No one dared to second-guess Marty. Whitman's ability to out-think anyone has long been a fearsome thing. No one to this day can keep up with his lickety-split ability to read and analyze a company's 10-K filing."

"The Fund's definition of Net-Nets is taken from Graham and Dodd's Security Analysis, but with a few twists. Graham and Dodd relied on a GAAP classified balance sheet to define current assets in order to ascertain if a common stock was a Net-Net. TAVF uses its own judgment rather than GAAP classification to define current assets in order to decide what is a liquid, i.e., current, asset."

"Value investors never hesitate when they ask "What's the bad news?" and "What's wrong?" Last year, Seth Klarman talked about the bad news of value investing and complained that the field is getting too crowded. On February 16 th, 2006, Martin Whitman went further to make a list about what's wrong with value investing in his talk at NYSSA."

"Whitman has also been deemed "one of the keener minds in the investment world" by Morningstar fund analyst Kerry O'Boyle, so when Whitman speaks, we listen. Whitman has authored The Aggressive Conservative Investor and Value Investing: A Balanced Approach. Both of these books shed light on his approach. Additionally, Whitman publishes thoughtful quarterly letters that outline recent transactions and provide commentary on timely topics."

"During the quarter, I reread three volumes authored by great economists: The General Theory of Employment, Interest and Money by John Maynard Keynes, The Road to Serfdom by F. A. Hayek, and Capitalism and Freedom by Milton Friedman. I came away with the impression that each was observing the earth with their naked eyes from 80,000 feet up. They missed a lot of details that are part and parcel of every value investor's daily life."

"Martin Whitman, manager of the Third Avenue Value Fund, hired Curtis Jensen in 1995 as a successor. A decade later, Whitman, 81 years old, still has not set a retirement date, and his mutual fund is outperforming the Standard & Poor's 500-stock index for a sixth consecutive year."

"Whitman School alumni and Wall Street giants Marty Whitman, of Third Avenue Management, and Robert Menschel, of the Goldman Sachs Group, discuss their approaches to investing and the people and experiences that have shaped them as financiers."

"This year, I led seminars on value investing at the Schools of Management at both Syracuse University and Yale University. At the first session of the seminar programs, I contrasted the underlying assumptions pervading value investing with the underlying assumptions that seem to govern both academic finance and conventional research department analyses. Hopefully, it will be useful for TAVF shareholders if I share with them what I said at these first sessions, as well as how I believe the Fund's investment approach comports with a number of the underlying assumptions."

"Running Mutual funds and Money management beats work. These Managers hardly work and continue to generate terrible returns. Market gives you an 8-10% return, and these managers with their intelligence under perform the market."

"Whitman is one of the truly great investors of modern times. He's also charming, gracious and refreshingly outspoken. He will criticize anyone: Alan Greenspan, Bill Miller of Legg Mason, even Graham and Dodd, the Columbia professors who wrote the classic text, "Security Analysis.""

"Another quirk that distinguishes Mr. Wadhwaney and the analysts who work with him - Jakub S. Rehor and Matthew P. Fine - is that they are acolytes in what Mr. Rocco called the "Church of Marty." Marty, as he is known to the staff at Third Avenue Management, is the founder, Martin J. Whitman, 80, who started the flagship Third Avenue Value fund in 1990. Since then, the company has added three funds, including International Value."

"Judged by TAVF's record, the Fund does not seem to participate too much in markets characterized by instantaneous efficiency. On its record, Third Avenue has outperformed relevant indexes on average, most of the time, and over the long term. Believers in the EMH seem to believe that these results are not good enough - TAVF ought to outperform indexes consistently, i.e., all the time. I demur; and I think most investors, or in any event Third Avenue shareholders, would agree with me."

"When buying stocks, Whitman's mantra is "safe and cheap." Whitman was an expert in bankruptcy investing before entering the fund business, and he favors companies that have the strength to pay off their debts. "First and foremost, we look for stocks with fortresslike balance sheets," says Curtis Jensen, 42, manager of Small-Cap Value and Whitman's heir apparent. The funds are filled with shares of banks, insurers, energy companies, real estate developers and other asset-rich firms whose values are easily quantified."

"The underlying characteristic of these superior managements, in my opinion, is that they seem to focus on the same things TAVF focuses on as a buy-and-hold investor, i.e., long-term wealth creation. Unlike most stock market participants, the primary focus of these managements is not on what periodic reported earnings per share, or periodic EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), might be. In creating wealth, these opportunistic managements realize that there tend to be many ways to create wealth besides enjoying operating earnings. These other methods of creating wealth include enjoying super attractive access to capital markets, both credit markets and equity markets; being able to make opportunistic acquisitions of other companies and other assets; being able to opportunistically launch new businesses; and being able to take advantage of basic mispricings in securities markets in order to, inter alia, repurchase outstanding common stock, spin-off glamorous subsidiaries, or liquidate assets in whole or in part."

"A radical change in thinking seems needed if GAAP are to be made more sensible, and even more useful as an analytical tool. Given its present direction, GAAP increasingly impose unneeded and counter-productive burdens on American corporations, American management and American capital markets. GAAP, first and foremost, ought to be geared toward meeting the needs and desires of creditors rather than the needs and desires of short-run stock market speculators, who are vitally interested in day-to-day stock market price fluctuations. Currently, GAAP are directed increasingly toward meeting the needs and desires of short-run stock market speculators. This is accomplished by setting up increasingly rigid sets of rules designed to meet an impossible goal: have periodic statements of cash flows from operations, earnings and earnings per share be as accurate (or truthful) as possible."

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